Limits of Current US Prediction Markets (PredictIt Case Study)

This is a great article, and those factors definitely skew PredictIt markets in my experience. I won a lot of money on PredictIt in 2016 and was dismayed to discover the "withdrawal fee" in addition to the 10% vig.

My advice for PredictIt is only use it if you want to bet on a 5x+ return that you feel really good about.

The lack of liquidity and the huge cuts that PI take certainly make it less profitable, but ironically the $800 limit might make it more likely that prices fall strongly out of touch with reality. (No whales to pull a market back into line). There is certainly money to be made there, but def not as simple as pushing a small edge.

Once some crypto markets really take off with much higher liquidity and larger pools of money in markets, it will be interesting to see if they make prediction markets more efficient, or whether by their nature they will always skew to systematic biases (overvaluing the rare event for example - there is a huge difference between something having a 0.01% chance of happening and a 1% chance of happening, which prediction markets rarely capture.)

A bit unrelated to the article, but I have often wondered if there are certain users of prediction markets that have a much better track record than the average person (not just statistical noise, but actually better at predicting events). If so, it seems the owner of the prediction market could ensemble these users’ predictions to make a much better overall prediction than any one individual user.

Is there a reason why the fees (transaction and withdraw) are so high? Lack of competition? Compliance being expensive?

The top comment on the article itself suggests that the UK’s betting markets don’t have the problems that limit PI.

They are currently +-0.05$ of PI. A material but not enormous difference

I agree with the content of the article, but feel a summary is sufficient to get the point across. Beginning with a quote:

> If someone claims to have better information than a mainstream financial market on the value of Google stock, or of copper, they ought to either use this knowledge to make a huge amount of money or stop talking about it. However, it is not true if we are discussing prediction markets. Current prediction markets are so bad in so many different ways that it simply is not surprising for people to know better than them, and it often is not possible for people to make money from knowing better.

Ok so why is this?

- Betting markets are illiquid, there is not enough activity for good price discovery.

- Betting markets are capital inefficient. In real life I can short a security without putting up any cash up front, paying interest as my position ages. To make a x:1 return in the betting market I must collateralize (lock away) the entire "1" at the outset. Another example: Say I think Trump will make it to the end of his term as president, right now on PredictIt I can make $1 for every ~$0.80 bet. In real markets I'd sell "no" shares to collect the $0.20 premium for essentially free (if I'm right). On PredictIt I have to stake $0.80 upfront (by buying "yes" shares) for every $0.20 I want to make.

- Betting markets are EXPENSIVE. PredictIt takes a 10% fee on profits and then a 5% fee on all withdrawals. So not only do you have to be right, you have to hit it on a huge margin!